What is an ICO and is it the right funding route for your business?

The internet may be abuzz with bitcoin evangelists but that doesn’t mean you should launch a cryptocurrency of your own to fund your SME

An Initial Coin Offering (ICO) is a means of fundraising that converts traditional currencies or cryptocurrencies such as bitcoin into a new token unique to your platform.

One form of ICO sees the distribution of a utility token that serves a specific purpose on your platform. This disincentives users from hoarding tokens as the tokens instead grant them an experience within the platform or meet a need they might have.

Another ICO comes in the form of a security token, which allows speculators to bet on the tokens increasing in value and potentially bringing them a return on their investment.

There can be crossovers like the value of a token increases along with the popularity of the platform. Similarly, the tokens bought for speculation that were created to build confidence in and encourage collective ownership of a platform will still serve a purpose in the eyes of the creator.

Think of the blockchain as a string of code that acts as a public ledger. If part of this code is transferred between owners, the entire blockchain records it. This code cannot be broken without the entire blockchain knowing about it. In essence, its purpose is to create a digital asset with the same qualities of a real-world asset.

So if you’re looking to further the blockchain revolution to transform the world or just build something that investors expect will rise in value then it’s worth getting help from a lawyer and other professionals to help ensure you’re staying on the right side of your local financial laws.

Do I need a utility token?

Based on the regulations that exist today, here are the key reasons why the use of a utility token might be the best way to support your company’s technology. Firstly, if you’re a charity, a financial or political body or a business intermediary, then your operations require full transparency to be compliant. Secondly, it’s also a good idea if your organisation requires or issues contracts that facilitate transactions between two parties that can only occur once clear terms are reached. A third reason you may want to issue a utility token is if you have digital assets ready for real world consumption, material properties or just need to know which asset is the original one.

If you didn’t recognise one of the above characteristics in your own technology, then an ICO probably isn't for you. However, you may still feel that blockchain could help you to improve, streamline or safeguard one or more aspects of your business.

Due to the related cost and regulations, there are numerous downsides to running an ICO compared to a traditional fundraising method. It’s a hugely speculative and treacherous market for investors at moment, which will undoubtedly produce some big winners and losers. As we witness the expansion of the dot.com 2.0 bubble, we can expect the next tech giants to emerge from this blooming innovation.

You can be sure that those investors who cashed in on the cryptocurrency boom will now be carefully watching the new innovations in blockchain technology. So, despite a drop in market value in recent months, there’s no shortage of liquidity in the market – many ICOs are receiving plenty of investment as a result.

If you’re happy to take a risk which could see you reap huge rewards, then it’s worth looking further into the prospect of an ICO. However, you’ll need to be prepared to dedicate months of your life where you’ll be focussed on nothing but your ICO. It’s also a venture that’ll probably eat-up much of your savings. Still, if you have a penchant to change the world and help to transform the business world with some long-awaited transparency, then you’ll no doubt have the dedication required.If you don’t think the ICO risk is worth taking, then a traditional funding route will likely be the better option for you. Of course, it’s always good to know what fundraising option are out there and now you know a lot more about ICOs than most.

About the Author

John Auckland is a crowdfunding specialist and founder of TribeFirst, a global crowdfunding communications agency that has helped raise in excess of £5m for over 30 companies on platforms such as Crowdcube, Seedrs, Indiegogo and Kickstarter – with a greater than 85% success rate. TribeFirst is the world's first dedicated marketing communications agency to support equity crowdfunding campaigns and the first in the UK to provide PR and Marketing campaigns on a mainly risk/reward basis.